1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the period ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from: Commission file number 0-19411 SUMMIT CARE CORPORATION (Exact name of Registrant as specified in its charter) California 95-3656297 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2600 W. Magnolia Blvd. Burbank, California 91505-3031 (address of principal executive offices) (818) 841-8750 (Registrant's telephone number, including area code) Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicate by checkmark whether the Registrant (1) has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Shares of Registrant's common stock outstanding at December 31, 1997 -- 6,812,500 ================================================================================ 2 SUMMIT CARE CORPORATION FORM 10-Q QUARTER ENDED DECEMBER 31, 1997 TABLE OF CONTENTS Page of Form 10-Q --------- Part I - Financial Information Item 1. Financial Statements Consolidated Statements of Income 3 Consolidated Balance Sheets 4 Consolidated Statements of Cash Flows 6 Notes to Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Part II - Other Information Item 6. Exhibits and Reports on Form 8-K 18 Signatures 19 2 3 PART I SUMMIT CARE CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In thousands, except per share data) THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, 1997 1996 1997 1996 --------- --------- --------- --------- Net revenues $53,972 $46,181 $108,507 $95,088 Expenses: Salaries and benefits 24,132 22,309 47,742 43,386 Supplies 5,091 5,337 10,261 10,381 Purchased services 12,844 12,237 26,211 24,144 Provision for doubtful accounts 957 721 1,780 967 Other expenses 3,738 2,824 7,484 6,258 Rent 762 713 1,525 1,410 Depreciation and amortization 2,151 1,840 4,235 3,632 Interest (net of interest income, $169 and $371 in 1997 and $179 and $393 in 1996, respectively) 2,311 1,934 4,588 4,057 ------- ------- -------- ------- 51,986 47,915 103,826 94,235 ------- ------- -------- ------- Income (loss) before provision for income taxes 1,986 (1,734) 4,681 853 Provision (benefit) for income taxes 784 (685) 1,849 337 ------- ------- -------- ------- Net income (loss) 1,202 $(1,049) 2,832 $ 516 ======= ======= ======== ======= Earnings (loss) per share: Basic $ 0.18 $ (0.15) $ 0.42 $ 0.08 ======= ======= ======== ======= Diluted $ 0.18 $ (0.15) $ 0.41 $ 0.08 ======= ======= ======== ======= See accompanying notes. 3 4 SUMMIT CARE CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands) DECEMBER 31, 1997 JUNE 30, 1997 ----------------- ------------- (Unaudited) (Note) ASSETS Current assets: Cash and cash equivalents $ 1,702 $ 3,994 Accounts receivable, less allowance for doubtful accounts: December 1997 - $2,474; June 1997 - $2,028 36,343 33,749 Supplies inventory, at cost 3,204 2,690 Other current assets 15,569 12,356 -------- -------- Total current assets 56,818 52,789 Property and equipment, at cost: Land and land improvements 20,036 19,513 Buildings and leasehold improvements 175,078 161,080 Furniture and equipment 24,361 23,978 Construction in progress 5,298 5,947 -------- -------- 224,773 210,518 Less accumulated depreciation and amortization 30,220 28,605 -------- -------- 194,553 181,913 Notes receivable, less allowance for doubtful accounts: December 1997 - $363; June 1997 - $322 6,842 6,859 Other assets 9,207 8,955 -------- -------- $267,420 $250,516 ======== ======== NOTE: The balance sheet at June 30, 1997 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See accompanying notes. 4 5 SUMMIT CARE CORPORATION CONSOLIDATED BALANCE SHEETS (CONTINUED) (In thousands) DECEMBER 31, 1997 JUNE 30, 1997 ----------------- ------------- (Unaudited) (Note) LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Payable to bank $ 2,985 $ 4,678 Accounts payable 36,776 29,586 Employee compensation and benefits 4,622 5,877 Income taxes payable 1,051 -- -------- -------- Total current liabilities 45,434 40,141 Long-term debt 129,754 121,452 Deferred income taxes 7,511 7,511 -------- -------- Total liabilities 182,699 169,104 Commitments and contingencies Shareholders' equity: Preferred stock, no par value, 2,000 authorized shares, none issued -- -- Common stock, no par value, 100,000 authorized shares; 6,813 and 6,776 issued and outstanding, respectively 52,020 51,543 Retained earnings 32,701 29,869 -------- -------- Total shareholders' equity 84,721 81,412 -------- -------- $267,420 $250,516 ======== ======== NOTE: The balance sheet at June 30, 1997 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See accompanying notes. 5 6 SUMMIT CARE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) SIX MONTHS ENDED DECEMBER 31, 1997 1996 -------- -------- Operating activities: Net income $ 2,832 $ 516 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 4,235 3,632 (Increase) in accounts receivable, net (2,594) (5,027) (Increase) in supplies inventory (514) (66) (Increase) in other current assets (3,152) (1,602) Increase in accounts payable 7,190 6,805 (Decrease) increase in employee compensation and benefits (1,255) 294 Increase (decrease) in income taxes payable 1,051 (989) -------- -------- Total adjustments 4,961 3,047 -------- -------- Net cash provided by operating activities 7,793 3,563 -------- -------- Investing activities: Issuance of notes receivable (2,281) (550) Principal payments of notes receivable 2,294 253 Additions to property and equipment (6,706) (12,049) Property and equipment related to purchase of nursing center (4,209) -- (Increase) in other assets (470) (1,579) -------- -------- Net cash (used in) investing activities (11,372) (13,925) -------- -------- Financing activities: (Decrease) in payable to bank (1,693) (1,229) Principal payments on long-term debt (10,497) (8,435) Proceeds from long-term debt 13,000 19,000 Proceeds from exercise of stock options 477 -- -------- -------- Net cash provided by financing activities 1,287 9,336 -------- -------- (Decrease) in cash and cash equivalents (2,292) (1,026) Cash and cash equivalents at beginning of year 3,994 2,658 -------- -------- Cash and cash equivalents at end of the period $ 1,702 $ 1,632 ======== ======== 6 7 SUMMIT CARE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (Unaudited) (In thousands) SIX MONTHS ENDED DECEMBER 31, 1997 1996 ------ ----- Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 5,015 $ 5,161 Income taxes 808 1,654 Non cash investing and financing activities: Acquisition of nursing care center under capital lease 5,799 -- Capital lease obligation (5,799) -- See accompanying notes. 7 8 SUMMIT CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands) 1. The unaudited financial information included herein, in the opinion of management, reflects all adjustments (all of which are of a normal recurring nature except for a special charge recorded in December 1996, see Note 5), which are considered necessary to fairly state the Company's financial position, its cash flows and the results of operations. These statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the Company's annual report filed on Form 10-K for the year ended June 30, 1997. The interim financial information herein is not necessarily representative of that to be expected for a full year. 2. Certain amounts have been reclassified to conform with fiscal 1998 presentations. 3. The following table sets forth the computation of basic and diluted earnings per share: Three Months Ended Six Months Ended December 31, December 31, 1997 1996 1997 1996 ------- ------- ------- ------- Numerator: Net income (loss) $1,202 $(1,049) $2,832 $ 516 Denominator: Denominator for basic earnings per share - weighted average shares 6,802 6,775 6,789 6,774 Effect of stock options 58 66 46 80 ------ ------- ------ ------ Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions 6,860 6,841 6,835 6,854 Earnings per share: Basic $ 0.18 $ (0.15) $ 0.42 $ 0.08 ====== ======= ====== ====== Diluted $ 0.18 $ (0.15) $ 0.41 $ 0.08 ====== ======= ====== ====== 8 9 SUMMIT CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.) (Unaudited) (In thousands) 4. Other current assets consist of the following: December 31, 1997 June 30, 1997 ----------------- ------------- Due from third-party payors $ 4,743 $ 2,491 Deferred tax assets 1,956 1,956 Notes receivable 1,257 1,253 Prepaid expenses 2,526 1,004 Income tax receivable 3,000 4,128 Other receivables 2,087 1,524 ------- ------- $15,569 $12,356 ======= ======= 5. In December 1996, the Company recorded a special charge of $4,000 against revenues ($2,420 against net income) as a result of adjustments proposed by Medicare in connection with an audit of fiscal 1995 completed in the quarter ended December 31, 1996, which would have an effect on revenues for that fiscal year, fiscal 1996 and the six months ended December 31, 1996. 6. In July 1997, the Company opened its fifth assisted living center with 66 beds in Orange, California, at a total cost of construction of $3,924. In September 1997, the Company exercised a purchase option in the amount of $1,871 in its lease of a 111-bed skilled nursing care center in La Grange, Texas. In November 1997, the Company opened 47 additional beds at one of its two skilled nursing care centers in Lubbock, Texas, at an approximate cost of construction of $1,900. In December 1997, the Company acquired the assets of a 194 bed skilled nursing care center in McAllen, Texas at an approximate cost of $10,058. The Company's bank line of credit was used to finance the two construction projects, the exercise of the purchase option and $4,259 of the acquisition cost of the McAllen center. The balance of the McAllen acquisition cost of $5,799 was financed with a capitalized lease obligation. 7. In December 1997, the Company amended its secured bank line of credit by reducing the commitment from $40,000 to $33,000. One of the four lenders was deleted from the credit agreement, and the revolving credit termination date was extended one year to September 30, 1999. No other terms and conditions were added, deleted or amended. 8. Recent Accounting Pronouncement: In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), which is effective for fiscal years ending after December 15, 1997. This Statement is not required to be applied to interim financial statements in the initial year of its application. SFAS 131 establishes standards for the way that public enterprises report information about operating segments in annual financial 9 10 SUMMIT CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.) (Unaudited) (In thousands) statements. It also requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. Under existing accounting standards, the Company has reported its operations as one line of business because substantially all of its revenues have been derived from its skilled nursing care centers and assisted living centers and closely related ancillary services. The Company is presently evaluating the new standard in order to determine its effect, if any, on the way the Company might report its operations in the future. 9. Subsequent Event: On February 6, 1998, the Company and Fountain View, Inc., a privately-held skilled nursing care company based in Los Angeles, California, entered into a definitive merger agreement for Fountain View to acquire the Company. According to the terms of the merger agreement, the Company's shareholders will receive $21.00 per share in cash for a total purchase price of approximately $274 million, including the assumption of approximately $130 million of the Company's debt. On February 13, 1998, Fountain View commenced a cash tender offer for all outstanding shares of the Company's stock at $21.00 per share. Following consummation of the tender offer, subject to the terms and conditions contained in the merger agreement, the Company will be merged with a wholly owned subsidiary of Fountain View, and each remaining outstanding share of the Company will be converted in the merger into $21.00 in cash. Fountain View has received a commitment from Heritage Fund II, L.P. for $82 million of the equity financing necessary to complete the transaction and a bank financing commitment from Bank of Montreal covering an additional $250 million. Completion of the tender offer and the merger are subject to customary conditions to closing, including the receipt of any applicable regulatory approvals and the expiration of any applicable regulatory waiting periods. 10 11 SUMMIT CARE CORPORATION FORM 10-Q MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands) RESULTS OF OPERATIONS QUARTER ENDED DECEMBER 31, 1997 COMPARED TO QUARTER ENDED DECEMBER 31, 1996 Net revenues increased $7,791 or 16.9% from $46,181 for the quarter ended December 31, 1996 to $53,972 for the quarter ended December 31, 1997. The increase occurred due to the following: AMOUNT PERCENT ------ ------- 1. Special charge to Medicare revenues $4,000 51.4% 2. Increased census days and revenue rates 2,035 26.1 3. New beds opened in fiscal years 1997 and 1998 2,017 25.9 4. Pharmacy operations 516 6.6 5. Rehabilitative and other specialty services (777) (10.0) ------ ----- $7,791 100.0% ====== ===== In December 1996, the Company recorded a special charge of $4,000 against Medicare revenues as a result of adjustments proposed by Medicare in connection with an audit of fiscal 1995, which would have an effect on revenues for that fiscal year, fiscal 1996 and the six months ended December 31, 1996. Average occupancy was 86.7% in the second quarter ended December 31, 1997 and 84.4% in the second quarter ended December 31, 1996. Excluding newly constructed beds, the average occupancy was 89.6% in the second quarter ended December 31, 1997 and 86.3% in the same quarter last year. The Company's quality mix (revenues from Medicare, managed care and private pay patients as a percentage of gross revenues excluding pharmacy revenues) was 67.5% in the second quarter ended December 31, 1997 and 69.5% in the second quarter ended December 31, 1996. Expenses, consisting of salaries and benefits, supplies, purchased services, provision for doubtful accounts and other expenses as a percent of net revenues, before the effect of the special charge, increased from 86.5% of net revenues in the second quarter ended December 31, 1996 to 86.6% in the second quarter ended December 31, 1997. Total salaries and employee related benefits were 44.7% of net revenues in the second quarter ended December 31, 1997 compared to 44.5% of net revenues, before the effect of the special charge, in the second quarter ended December 31, 1996. Expenses increased $3,334 or 7.7% from $43,428 in the second quarter ended December 31, 1996 to $46,762 in the second quarter ended December 31, 1997 for the following reasons: 11 12 SUMMIT CARE CORPORATION FORM 10-Q MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) AMOUNT PERCENT ------ ------- 1. Expenses relating to new beds opened in fiscal years 1997 and 1998 $1,673 50.2% 2. Salaries and benefits 1,012 30.4 3. Other expenses 764 22.9 4. Rehabilitative and other specialty services (115) (3.5) ------ ----- $3,334 100.0% ====== ===== Income before rental, depreciation and amortization and interest expense, net of interest income, increased $4,457 or 161.9% from $2,753 in the second quarter ended December 31, 1996 to $7,210 in the second quarter ended December 31, 1997, and was 13.4% of net revenues in the second quarter ended December 31, 1997 compared to 6.0% in the second quarter ended December 31, 1996 (and 13.5% of net revenues before the special charge to revenues). Rent, depreciation and amortization and interest expense, net of interest income, increased by $737 or 16.4% from $4,487 in the second quarter ended December 31, 1996 to $5,224 in the second quarter ended December 31, 1997. Substantially all of this increase was due to interest expense related to higher debt and depreciation expense related to capital additions. The Company's effective tax rate was 39.5% of income in the second quarter ended December 31, 1997 and in the second quarter ended December 31, 1996. Net income increased $2,251 from a net loss of $1,049 in the second quarter ended December 31, 1996 to net income of $1,202 in the second quarter ended December 31, 1997. The net loss of $1,049 in the second quarter ended December 31, 1996, included $2,420 for the special charge described earlier. Net income before the special charge, decreased $169 or 12.3% from $1,371 in the second quarter ended December 31, 1996 to $1,202 in the second quarter ended December 31, 1997. 12 13 SUMMIT CARE CORPORATION FORM 10-Q MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) SIX MONTHS ENDED DECEMBER 31, 1997 COMPARED TO SIX MONTHS ENDED DECEMBER 31, 1996 Net revenues increased $13,419 or 14.1% from $95,088 for the six months ended December 31, 1996 to $108,507 for the six months ended December 31, 1997. The increase occurred due to the following: AMOUNT PERCENT ------ ------- 1. Increased census days and revenue rates $4,874 36.3% 2. Special charge to Medicare revenues 4,000 29.8 3. New beds opened in fiscal years 1997 and 1998 3,973 29.6 4. Pharmacy operations 1,406 10.5 5. Rehabilitative and other specialty services (834) (6.2) ------- ----- $13,419 100.0% ======= ===== In December 1996, the Company recorded a special charge of $4,000 against Medicare revenues as a result of adjustments proposed by Medicare in connection with an audit of fiscal 1995, which would have an effect on revenues for that fiscal year, fiscal 1996 and the six months ended December 31, 1996. Average occupancy was 87.2% in the six months ended December 31, 1997 and 84.0% in the six months ended December 31, 1996. Excluding newly constructed beds, the average occupancy was 90.3% in the six months ended December 31, 1997 and 85.9% in the same period last year. The Company's quality mix (revenues from Medicare, managed care and private pay patients as a percentage of gross revenues excluding pharmacy revenues) was 68.3% in the six months ended December 31, 1997 and 69.7% in the six months ended December 31, 1996. Expenses, consisting of salaries and benefits, supplies, purchased services, provision for doubtful accounts and other expenses as a percent of net revenues, before the effect of the special charge, increased from 85.9% of net revenues in the six months ended December 31, 1996 to 86.1% in the six months ended December 31, 1997. Total salaries and employee related benefits were 44.0% of net revenues in the six months ended December 31, 1997 compared to 43.8% of net revenues, before the effect of the special charge, in the six months ended December 31, 1996. 13 14 SUMMIT CARE CORPORATION FORM 10-Q MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) Expenses increased $8,342 or 9.8% from $85,136 in the six months ended December 31, 1996 to $93,478 in the six months ended December 31, 1997 for the following reasons: AMOUNT PERCENT ------ ------- 1. Expenses relating to new beds opened in fiscal years 1997 and 1998 $3,232 38.7% 2. Salaries and benefits 2,776 33.3 3. Other expenses 1,540 18.5 4. Rehabilitative and other specialty services 794 9.5 ------ ----- $8,342 100.0% ====== ===== Income before rental, depreciation and amortization and interest expense, net of interest income, increased $5,077 or 51.0% from $9,952 in the six months ended December 31, 1996 to $15,029 in the six months ended December 31, 1997 and was 13.9% of net revenues in the six months ended December 31, 1997 compared to 10.5% in the six months ended December 31, 1996 (and 14.1% of net revenues before the special charge to revenues). Rent, depreciation and amortization and interest expense, net of interest income, increased by $1,249 or 13.7% from $9,099 in the six months ended December 31, 1996 to $10,348 in the six months ended December 31, 1997. Substantially all of this increase was due to interest expense related to higher debt and depreciation expense related to capital additions. The Company's effective tax rate was 39.5% of income in the six months ended December 31, 1997 and in the six months ended December 31, 1996. Net income increased $2,316 from $516 in the six months ended December 31, 1996 to $2,832 in the six months ended December 31, 1997. The net income of $516 for the six months ended December 31, 1996 included $2,420 for the special charge described earlier. Net income before the special charge, decreased $104 or 3.5% from $2,936 in the six months ended December 31, 1996 to $2,832 in the six months ended December 31, 1997. 14 15 SUMMIT CARE CORPORATION FORM 10-Q MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) Selected statistics are shown below: FISCAL ------------------- INCREASE 1998 1997 (DECREASE) ------ ----- -------- Facilities in operation at: September 30 40 39 1 December 31 41 39 2 Nursing center beds at: September 30 4,631 4,629 2 December 31 4,872 4,629 243 Assisted living beds at: September 30 475 468 7 December 31 475 468 7 Total beds at: September 30 5,106 5,097 9 December 31 5,347 5,097 250 Total occupancy: First quarter 87.7% 83.6% 4.1% Second quarter 86.7% 84.4% 2.3% Nursing center occupancy: First quarter 88.6% 84.1% 4.5% Second quarter 87.5% 84.9% 2.6% Assisted living center occupancy: First quarter 79.6% 78.7% 0.9% Second quarter 79.5% 79.6% (0.1)% Percentage of revenues from private, managed care and Medicare (quality mix): First quarter 69.1% 69.9% (0.8)% Second quarter 67.5% 69.5% (2.0)% Percentage of revenues from Medicaid: First quarter 30.9% 30.1% 0.8% Second quarter 32.5% 30.5% 2.0% 15 16 SUMMIT CARE CORPORATION FORM 10-Q MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) LIQUIDITY AND CAPITAL RESOURCES At December 31, 1997, the Company had $1,702 in cash and cash equivalents and working capital of $11,384. During the six months ended December 31, 1997, the Company's cash and cash equivalents decreased by $2,292. Net cash provided by operating activities increased $4,230 from $3,563 in the first six months of fiscal 1996 to $7,793 in the first six months of 1997. Net cash provided by operating activities, plus an increase in credit line borrowings outstanding of $9,000 and the acquisition of a capital lease of $5,799, related to the purchase of a skilled nursing care center in McAllen, Texas (see Note 6), were used principally for capital expenditures of $6,706 for existing centers, $10,008 for property and equipment related to the purchase of the skilled nursing care center described above and principal payments on long-term debt of $6,497. Accounts receivable increased $2,594 primarily due to payment delays in Medicare and Medicaid. At December 31, 1997, the Company's average accounts receivable days outstanding were 40 compared to 41 days outstanding at June 30, 1997 and December 31, 1996. Long-term debt, totaling $129,754 at December 31, 1997, consisted of mortgage indebtedness of $8,083 on three properties, $16,821 on five capitalized leases, $90,850 in senior secured debt, and credit line borrowings of $14,000. The Company believes that it has sufficient cash flow from its existing operations and from its bank line of credit to service long-term debt due within one year of $8,956 (the Company intends to borrow this amount against its bank line of credit which has a revolver extending to September 30, 1999 followed by a three year payment period), to make normal recurring capital replacements, additions and improvements of approximately $6,400 planned for the next 12 months, to develop properties over the next 12 months costing approximately $800 and to meet other long-term working capital needs and obligations. The Company expects, on a selective basis, to pursue expansion of its existing centers and the acquisition or development of additional centers in markets where demographics and competitive factors are favorable. 16 17 SUMMIT CARE CORPORATION FORM 10-Q MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) (Dollars in thousands) IMPACT OF INFLATION The health care industry is labor intensive. Wages and other expenses increase more rapidly during periods of inflation and when shortages in the labor market occur. In addition, suppliers pass along rising costs in the form of higher prices. Increases in reimbursement rates under Medicaid generally lag behind actual cost increases, so that the Company may have difficulty covering them in a timely fashion. RECENT ACCOUNTING PRONOUNCEMENT See Note 8 to Consolidated Financial Statements. 17 18 PART II SUMMIT CARE CORPORATION OTHER INFORMATION QUARTER ENDED DECEMBER 31, 1997 Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.45 Limited Liability Company Agreement of APS-Summit Care Pharmacy, L.L.C., dated November 30, 1996. 10.46 Robert Crone-South Texas Health Care, Inc. Agreement of Purchase and Sale of Assets of Briarcliff Nursing and Rehabilitation Center dated November 24, 1997. 10.47 Agreement and Plan of Merger Among Summit Care Corporation, Fountain View, Inc., FV-SCC Acquisition Corporation and Heritage Fund II, L.P., dated February 6, 1998. 10.48 Summit Care Corporation Special Severance Pay Plan dated February 6, 1998. (b) Reports on Form 8-K On February 11, 1998 the Company filed a current report on Form 8-K with respect to its execution of an Agreement and Plan of Merger Among Summit Care Corporation, Fountain View, Inc., FV-SCC Acquisition Corporation and Heritage Fund II, L.P., dated February 6, 1998. 18 19 SUMMIT CARE CORPORATION SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SUMMIT CARE CORPORATION Date: February 13, 1998 By: S/DERWIN L. WILLIAMS ------------------------------------ Derwin L. Williams Sr.Vice President - Finance, Chief Financial Officer and Treasurer (Principal Financial Officer) Date: February 13, 1998 By: S/JOHN FARBER ------------------------------------- John Farber Vice President - Controller and Secretary (Principal Accounting Officer) 19